A negative budget, e.g.: planned operating deficit, leads to disaster

If a board votes negative budgets year after year without wresting itself from the abysmal situation, the board of directors is plainly abrogating its fiduciary responsibility. The board can be sued and one can further assert that the BD&O insurance does not cover malfeasance by the board, e.g.: fiscal irresponsibility.

Why do so many boards feel they can operate in a laissez faire atmosphere? In some cases its naïveté. In other cases, boards are obtuse or live to please their constituency, e.g.: not raise maintenance, not impose assessments. To what good purpose?

If a bank reviews the budget and the history of the co-op in anticipation of a line of credit or a loan, it will ask for several years of annual reports as well as the currant year’s budget and pro-forma.

What can the co-op pledge to the bank as collateral? The answer is the maintenance income. But if maintenance income does not cover the costs day-to-day, how will the co-op repay any loans or lines of credit?

A series of operating deficits as well as planned losses can preclude the acquisition of operating funds and lead to bankruptcy. In truth, there is a condo nearby to our co-op. It was a co-op, but the board ignored all the deficits over and over again. They went to the well one more time. This time, the bank said absolutely NO. In turn, the co-op was forced to convert to condo. Besides the normal transformation costs imposed upon each shareholder, e.g.: several thousands of dollars for each shareholder, the owners (shareholders) were required to absorb their prorate burden of the outstanding debt and payables of the co-op. These amounts were in the tens of thousands of dollars for each shareholder. Many were required to increase their loans by substantial amounts. So who won?

The monthly maintenance must cover all expenses, all payments for loans and lines of credits as well as fund and maintain a modest operating (cash) reserve fund. In addition, a board is remiss if it does not have a yearly ongoing assessment and sadly most co-op boards ignore the need for this capital reserve fund; even in the face of bylaws that define such a fund.

How many have read the AICPA document dealing with co-ops and condos as noted elsewhere in this board talk?

So, a co-op always needs to have its house in order.